Alan Sked founded Ukip as 'a non-sectarian, non-racist party with no prejudices against foreigners or lawful minorities of any kind'. Photograph: Graeme Robertson

The founder of Ukip is trying to prove to me that, when he was in charge, the party wasn't racist. He's also trying to demonstrate that his Ukip wouldn't have had its snout in the European parliament's expenses trough, unlike its 2014 incarnation. "I had one here not so long ago," says Alan Sked, professor of international history at the London School of Economics, as he searches for a membership application form as evidence.

It's a tough task: his office, the LSE's Room E503, is a stranger to the declutterer's art – it's not so much overwhelmed with books and papers as booby-trapped by them.

Room E503 is historically significant for modern British politics. It was here that Sked formed the Anti-Federalist League in 1991; here, in 1993, that the Anti-Federalist League became the UK Independence Party. It is here, too, that Sked is dreaming up his third British political party. Called New Deal, its aim is to do to Labour what Ukip did to the Tories – embarrass it electorally and whip up latent euroscepticism. He's considering standing against Ed Miliband in Doncaster in next year's general election.

But, first, where is that piece of paper? "You see," Sked says as he hunts, "up until 1997 I managed to keep Ukip a liberal – with a small 'l' – centre, moderate party. Our membership application form from the time – ah, here it is! – shows how much it has changed."

He hands me the form. It makes for fascinating reading. In 1993, along with backing British withdrawal from the EU, prospective members had to be sympathetic to the following: "It is a non-sectarian, non-racist party with no prejudices against foreigners or lawful minorities of any kind. It does not recognise the legitimacy of the European parliament and will send representatives only to the British parliament in Westminster."

"They got rid of all that after I left," says Sked, who resigned the leadership shortly after the 1997 general election. He claims that the tolerant, liberal and democratic party he founded was taken over by rightwingers and that, outgunned and outmanoeuvred by Farage and other leading figures after that election, he had no alternative but to quit.

"They took out the bit about no prejudices against lawful minorities and, as soon as I disappeared, they all decided they wanted to go to the European parliament and take their expenses."

Alan Sked at the launch of the UK Independence party in 1993. Photograph: STR News/Reuters

But those changes alone don't make 2014 Ukip racist, do they? "The de facto leader of Ukip since 1999 has been a racist political failure," Sked counters. He means, of course, Nigel Farage. But even if Farage's recent statements about not wanting to live next door to Romanians suggest he is xenophobic, is there any proof he was racist when he and Sked worked together in the mid-1990s? Sked laughs at the question and recalls an incident from 1997 when the two men were arguing over the kind of candidates that Ukip should have standing at the looming general election. "He wanted ex-National Front candidates to run and I said, 'I'm not sure about that,' and he said, 'There's no need to worry about the nigger vote. The nig-nogs will never vote for us.'"

How did Sked feel to hear such language? Who uses such racist words unless they think they're addressing a fellow racist or suspects they can co-opt the hearer into sharing their racist agenda? Sked shakes his head. "I was shocked," he says. "I had never heard people use those words. At the time, others thought he was being funny. I didn't. They showed what kind of man he is."

Sked argues that far-rightwingers who have worked for the National Front in the past now work for Ukip. "If he [Farage] runs in South Thanet, his agent will be a man called Heale who was a National Front organiser in west London." Sked means Martyn Heale, Ukip's branch chairman in Thanet and former National Front branch organiser in Hammersmith. It was after Sked left that he was allowed to join Ukip, rising to become Farage's election agent in the 2005 general election.

"The party I founded has become a Frankenstein's monster," sighs Sked. "When I was leader, we wouldn't send MEPs to Europe because we didn't want to legitimise it. My policy was that if we were forced to take the salaries, we would give them to the National Health Service – they wouldn't be taken by the party or individuals. Now Ukip say they're against welfare cheats coming from eastern Europe, but in fact they're the welfare cheats."

Sked's suggestion is that Ukip MEPs do little to no work in Strasbourg and Brussels but take as much public money as possible in the form of salaries and, especially, expenses.

But aren't Ukip MEPs in Strasbourg and Brussels there to expose the workings of the European parliament, and aren't their expenses funnelled into promoting the party's message that the UK should get out of the EU? Sked giggles. "Oh, that's nonsense," he says. "They're hardly ever there. They just turn up for expenses. They don't turn up for key debates." And when Ukip does vote, he suggests, there's no party line. "When there were only three Ukip MEPs, the LSE European Studies institute found they voted three different ways."

A few days later, I ring Sked to get his take on last week's local authority election results. Political pundits are widely suggesting that Ukip's victories demonstrate the party's emergence as a fourth national political force. Sked says he expects the party's European ineptitude to be replicated in town halls: "I feel very sorry for voters who are now going to have as councillors people who aren't very sophisticated, who have no local government policies and who have no experience in running things. All Ukip is good for, if their behaviour in Strasbourg and Brussels is anything to go by, is taking public money."

Any vote for Ukip in the European poll, says Sked, was wasted. "If you elect a Ukip MEP, you're just going to elect another incompetent charlatan that you're going to turn into another millionaire. They go native in Brussels, take the expenses and the perks and do fuck all."

This isn't perhaps the language one expects from a history professor, a former student of AJP Taylor and a world authority on the Habsburg empire. But Sked is an unusual academic who became so anti-EU that his students complained to former LSE director John Ashworth. Nothing came of the subsequent inquiry. Nowadays, though, it looks as if the LSE is restraining Sked from dispensing dyspeptic Eurosceptic jeremiads to impressionable youth. The man who was the LSE's Mr Europe in the 1980s now teaches courses on the history of the US and the rivalry between Prussia and Austria from 1618. He is currently finishing off his book Abraham Lincoln: The Critical History of an American Icon, due for publication next year, in which, he says, he will present the man venerated as "the great liberator" of African-American slaves as a "racist, war-mongering, illiberal president".

Sked reckons it was his experiences teaching at the LSE that turned him into a Eurosceptic. Between 1980 and 1990, he was convenor of European studies at the LSE and chaired its European Research Seminar. "I would meet all these European politicians and bureaucrats who came over, and the cumulative effect was that I realised it was time to get out. We had an Italian senator and MEP once. I said, 'How many mafiosi do you have in the European parliament?' He said, 'Oh, we only have about 12.' I spent 10 years meeting these loonies."

In the 1992 general election, Sked stood against Conservative chairman Chris Patten for the Anti-Federalist League in the marginal seat of Bath. Sked had experience of elections, having stood for the Liberals in 1970, but he had no history of humiliating Tory bigwigs. At a debate for the candidates, though, he did just that. "I stood up and said, 'Yes or no – do you apologise for the poll tax?' He had to say no. The headlines the day after said: 'Patten refuses to apologise for the poll tax'." Patten subsequently lost to Liberal Democrat candidate Don Foster – a scalp Sked claims was his.

"That remark cost Patten the election. I know he blames me for never becoming prime minister," says Sked. "So, if I did nothing else in my life, I did this one good thing. Considering what a mess he made of everything from the BBC [Patten resigned as its chairman earlier this month] to Hong Kong [Patten's was the colony's last governor], he would have been a dreadful prime minister. My life was not in vain if I spared the country that."

The anecdote is worth recalling, because Sked hopes to repeat what he did to Patten in Bath in 1992 to Ed Miliband in Doncaster in 2015.

As leader of his New Deal party, launched last autumn, Sked plans to stand against the Labour leader on a Eurosceptic platform. "My idea was, having created Ukip to put pressure on Tories on the right to make them Eurosceptic and campaign for a referendum, I would do the same thing for the left," he says.

But there is more to New Deal than Euroscepticism. It calls for the renationalisation of British Rail. Why? "The railway that's the most efficient is the east coast line and it's under direct control. The franchise didn't work. It came under public control and it gets the fewest subsidies of any rail company. It's rather silly when half the others are owned by the state railways of Germany. Why have we allowed the German state railways to run our railways when the British state isn't allowed to? It's madness."

"I'm basically a liberal, but we have huge inequality," he says. "My grand plan is that minority parties would manoeuvre the majority ones. This is my megalomania. I should probably be taken away by the people in white coats." Perhaps, but he's no more deluded or megalomaniac than the other ex-Ukip figure who set up his own party, former Labour MP and TV presenter Robert Kilroy-Silk, who founded the widely forgotten Veritas party in 2005.

And he's no more deluded or megalomaniac, perhaps, than Sked's Ukip successor, Nigel Farage. "He's been de facto leader of the party since 1999 and he hasn't won a single seat [at Westminster]," says Sked. "How he thinks he's going to get the balance of power I don't know. He must be swallowing his own propaganda." But some voters believe that propaganda, in part because Farage has managed to charm parts of the electorate with his beer-swilling everyman image. "Behind that image is someone who isn't bright," says Sked, who recalls trying to give the public school-educated Farage remedial grammar lessons: "I spent two hours trying to explain to him the difference between 'it's' with an apostrophe and 'its' without and he just flounced out the office saying, 'I just don't understand words.'"

Sked recalls, too, the letters of complaint he received from Salisbury, when Farage stood for Ukip in 1997's general election. "I remember one that said, 'I'm very glad your candidate believes in education, but until he learns to spell it, I'm not voting for him.' That's the kind of person people are voting for when they vote Ukip. Why does anyone have time for this creature? He's a dimwitted racist."